(Corrects ninth paragraph to show bond was index-linked, not
* February PMI data weakest in nearly four years
* Bond auction draws firm demand from investors
* Faltering growth puts deficit target out of reach
By Leigh Thomas and Nicholas Vinocur
PARIS, Feb 21 Economic data flagged a growing
risk of recession in the euro zone's second biggest economy,
France, on Thursday, but investors nonetheless snapped up the
country's bonds, banking on them as a safe bet.
Hot on the heels of Paris's admission that it would
overshoot its deficit target this year and that growth would be
a minimal 0.3 percent at best, a survey showed that business
activity this month contracted at the fastest pace in nearly
France's 2 trillion-euro economy already suffered a 0.3
percent contraction in the final three months of 2012 and the
further loss of momentum raises the spectre of extending into
But although France's deteriorating economic outlook is
increasingly cutting a stark contrast with euro zone powerhouse
Germany, its debt drew strong demand at the first bond auction
since the government gave up on its deficit target.
Investors sought more than twice the amount of fixed-rate,
medium-term bonds on offer and demanded only slightly higher
yields than in recent auctions where France has borrowed at
record low rates.
It continued a trend seen in France for some time, in which
investors put aside concerns about the country's economic and
fiscal state to buy bonds seen as part of Europe's core.
BNP Paribas economist Dominique Barbet said the economic
gloom presented a conundrum for bond investors by prompting them
to seek the safety of bonds in tough times while also straining
the state's capacity to pay its debts.
"One doesn't know which way to interpret things and maybe
the French bond market doesn't either," Barbet said, noting that
the vast liquidity of French bonds made them a favourite with
Demand for an 11-year index-linked bond at auction on
Thursday was oversubscribed.
The auction results landed only hours after Markit's
preliminary composite purchasing managers index (PMI) showed a
fall to 42.3 in February from 42.7 in January, hitting the
lowest level since early 2009 when France, like much of the
developed world, was mired deep in recession.
"There is a fairly consistent picture showing that the
French business sector is suffering its worst downturn since the
height of the financial crisis," Markit chief economist Chris
Service sector weakness was the main culprit for the decline
while the long-suffering manufacturing sector showed a rare
improvement, mirroring a trend seen earlier in a survey from the
INSEE statistics agency.
Markit said the PMI surveys pointed to a 0.7 percent
contraction in GDP for the first quarter of 2013, placing
France's economy on the same playing field as Spain and Italy -
and not Germany, which data suggests is picking up momentum.
Two consecutive quarters of contraction is considered the
minimum for a recession.
The government is waiting for forecasts from the European
Commission on Friday before drafting new economic targets, with
French media reporting that Brussels estimated the economy will
post nearly flat growth this year and a deficit of 3.6 percent.
Standard & Poor's Chief European economist Jean-Michel Six
said that keeping the deficit on a downward trend was more
important than hitting the deficit target.
"For a ratings agency like ours, it is the trend that counts
much more than a specific level at a specific time which in
itself reflects a European economy beyond the control of the
authorities," Europe 1 radio quoted Six as saying.
EU Economic and Monetary Affairs Commissioner Olli Rehn has
opened the door to giving countries more time to cut their
deficits if they prove their underlying deficit-cutting measures
are on track.
Though the bond market largely anticipated that the deficit
target would be dropped, the admission is a blow to France's
fiscal credibility with some of its euro zone partners who are
uneasy with giving France more time.
(Editing by Jeremy Gaunt)